ANALYSIS-Change buffets Brazil sugar sector's old guard

SAO PAULO, Oct 23 - The resignation last week of the chief executive of Cosan, Brazil's biggest sugar and ethanol producing group, is the latest wave in the storm of consolidation transforming Brazil's sugar and ethanol sector.

Rubens Ometto, who kept his position as Cosan chairman of the board, was preparing to leave day-to-day activities at Cosan for months, according to sources at the company.

But his departure surprised business leaders who are still getting used to the changes sweeping through the centuries-old sugarcane industry. The sector is still dominated by families, but professional managers have begun to replace the old patriarchs.

Major consolidation and change in Brazil's sugar and ethanol sector were evident on the sidelines of several industry events in Sao Paulo this week, culminating with the biennial Sugar Dinner on Thursday.

New faces populated seminars and meetings while many traditional business leaders and long-time market operators were absent or, in some cases, negotiating contacts "in search of new professional opportunities."

Next week another major shift may unfold if Santelisa Vale's shareholders, in a meeting scheduled for Monday, approve the company's sale to French commodities giant Louis Dreyfus.

The deal, involving the second largest sugar and ethanol group in Brazil, would end the Biagi family's major role in the sector. Family members will remain shareholders but probably will have no active role in the company.

Santelisa Vale, burdened by debt, had just emerged from a merger of two of Brazil's pioneer cane milling groups, Santa Elisa and Vale do Rosario, when the credit crunch set in.

The takeover could also extinguish one of Brazil's largest sugar and ethanol marketing groups, Crystalsev, in which Santelisa Vale is a main shareholder.

Another Crystalsev shareholder, Pioneiros Bioenergia mill, announced this week it was leaving the group and joining Copersucar, another major ethanol and sugar marketing group which has gone through major changes in recent years.

In July, it introduced an executive from the market to be the chairman of the board, a big step in the company's process of replacing shareholders with professional businessmen.

CRISIS HASTENS CHANGE

"I think this latest crisis will have a changing impact over the industry, bigger than any other. It will increase concentration, boost changes at the industry's structure and attract new players," said Plinio Nastari, president at Datagro consultants.

Within five years, Brazil's 10 largest groups are expected to control 45 percent of the national cane crush, up from 30 percent currently, according to Datagro's forecast.

There are currently 160 groups in the industry, owners of 430 sugar and ethanol mills. Brazil is the world's largest sugar and cane-based ethanol producer and exporter.

Brenco, an ethanol group backed by venture capitalist Vinod Khosla and AOL founder Steve Case, will likely be one of the next to be swallowed up by better financed rivals.

Earlier this month the company signed an agreement to study a merger with ETH, the ethanol and sugar subsidiary of construction and petrochemical giant Odebrecht. The merger would create the world's top ethanol producer if current plans of new mills are kept unchanged for both companies.

Nastari said the realignment has not gone exactly as expected. New groups have preferred to build greenfield projects rather than purchase decades-old plants.

"There's a high number of units with a capacity to crush between 1 and 2 million tonnes a year which are not being incorporated because they are in a different efficiency and technology situation than those being built," Nastari said.

Alexandre Figliolino, commercial director at Itau BBA, the investment arm of Brazil's largest private bank, said the market was expecting deals between medium-sized companies but they just never happened.